Fixing ‘too-big-to-fail’

The United States is plagued by large corporations with outsized political power. They are “too big to fail.” So if they are about to fail, they get rescued. Many are so big that they can block the laws needed to stop them from destroying the economy or the environment.

We need to replace them with smaller companies, but U.S. antitrust law is inadequate. It exists, but has been weakened over the past decades. Consider the proposed “Volcker Rule,” which would make many banks split into two companies, one for risky investments and one for loans based on savings, as the old Glass-Steagall law required. This would address some problems, but would not make banks small enough. Eliminating “too big to fail” banks means making sure that each is small enough that regulators, prosecutors and elected officials won’t hesitate to let it suffer the consequences of its own decisions.

Using anti-trust law now to split up a company requires a lawsuit, and many large companies can make that costly – as Microsoft did each time it was convicted. Corporations can also use their political influence to avoid being split, as Microsoft did when last convicted.

It is clear that the larger companies get, the harder it is to enforce antitrust laws against them. Yet, a business-friendly government can vitiate the law simply by launching no antitrust cases – as the Bush administration did.

When the government wins such a suit, the court splits up the company to remedy the specific anti-competitive behavior proved. It can’t split the company into 50 parts just to ensure they are all small enough. We can’t fix the problem of too-big-to-fail companies this way.

I propose another method ­– one that can be applied to all companies. It works through taxes. There will be no need to sue companies and split them up – because they will split themselves up.

The method is simple: a progressive tax on businesses. We tax a company’s gross income, with a tax rate that increases as the company gets bigger. Companies would be able to reduce their tax rates by splitting themselves up.

With this incentive, over time many companies will likely get smaller. They could subdivide in ways they consider most efficient – rather than as decided by a court. We can adjust the strength of the incentive by adjusting the tax rates. If too few companies split, we can turn up the heat.

Big companies can afford clever lawyers. They may try, for example, to pretend to split up into several companies that effectively work together as one. So the new tax law must recognize this and treat such entities as one company that pays the rate for its combined size. As for how to recognize and define such combinations, we can probably borrow solutions from antitrust law.

Companies have many accounting tactics for reducing their declared profits – so if the tax is levied on profits, they will likely game the system. It is far harder, however, for a company to disguise its gross income. So let’s compute the tax based on gross income. This is larger than the profit, so the tax rate we apply to gross income should be smaller than what we would use to tax profits.

Another advantage in this is that an inefficient company pays the same tax rate as an efficient company of the same size. A tax on profits would tax the efficient company more, because its profit would be a larger fraction of the same income.

You can also think of this as a variable-rate sales tax.

When corporations all pay the same sales tax rate, they pass the cost along to customers. Thus, if the goal is to tax wealthy business owners, a fixed sales tax doesn’t do the job.

However, businesses can’t pass the entire amount along to customers if they pay different tax rates. If a large company pays 5 percent and a competing small company pays 1 percent, they could both pass along 1 percent but no more. The owners of the large company would have to pay the other 4 percent – which is exactly what might convince them that splitting up is desirable.

This tax would operate gently but firmly on a long time scale. It would surely not make every large company split up in the first year. But it could well change a structure that promotes mergers into one that promotes dividing.

PHOTO (Top): A variety of logos hover above the Microsoft booth at the International Consumer Electronics Show (CES) in Las Vegas January 10, 2012. REUTERS/Rick Wilking

PHOTO (Insert): A man walks out of an Internal Revenue Services office on Tax Day in New York, April 15, 2009. REUTERS/Lucas Jackson

I’ve often saw a relationship between “too big to fail” and “too small to succeed.”

For example, how can a small grocery store compete against a WalMart in their neighborhood? It’s next to impossible. These “Super Corps” are shutting out Mom and Pop businesses, and then getting our tax dollars to bail them out of trouble when they mismanage themselves into bankruptcy. Something is wrong. Stallman has some great points.

Great idea, snowball’s chance in a hot place to actually be enacted, given our current political power distribution. But thanks Mr. Stallman, we still need great ideas since you never know when a good opportunity to pull them out may come along.

Reforms are required across the board indeed the Banks need special attention , VP Al Gore made great points last week on PBS and CNN about the impacts special interests are having on the basic democratic processes see http://www.pbs.org/newshour/bb/environme nt/jan-june13/gore_01-31.html

As for Dr Richard Stallman truly a leader in the code world great ideas and a son of Freemen everywhere , with his work on freeware a true champion of freedom through and for the internet .

Given that corporate power has largely usurped our government, and through the media controls democracy by controlling the thinking of a large fraction of our populace, it very hard to see how we can get from here to there, that is, from corporate power to people power. But, or course, it is still worth thinking about a better situation than we are presently in.

To me, the biggest problem though is the multinational issue: Multinational corporations can play the people of individual nations off against each other. Just as the individual US states grab jobs from each other using corporate tax incentives, the same occurs at the world level. Corporations go where they can get the best deals, which usually means low regulations and taxes: that is, the biggest corporate rip-offs of the people and the planet. An essential global need is control of the multinationals. The only way to face and control the multinational is through multinational people action, that is, world government. And that is a scary prospect.

So, the problem: how to control the multinational, yet maintain individual countries’ sense of nationality and diverse social systems? At a minimum, a world economic regulation and policing system is required, carefully set up to preclude takeover by corporations, individual nations, or individuals. This involves giving up a lot of national sovereignty (perhaps the main way multinationals keep the people divided and controllable). Or, do we just give up on nationhood and accept that we are global?

It is possible to redefine what makes a corporation or affiliate of one an “American” company. By excluding huge multinationals from most Government contracts, we can us American dollars for American workers and American businessmen. Why is General Electric considered an “American” company while Siemans is not? There is no good reason. Both are international behemoths with no allegiance or affinity for any particular country other than profit.

Of course, domestic (“American”) companies should be given access to tax breaks, such as research credits, that non-American companies are not. We need to take care of our own, but our own need to take care of us too.

You said: “The only way to face and control the multinational is through multinational people action, that is, world government.”

I can’t see your reasoning there. It seems to me that any developed nation, like Canada, for example, if its people stuck together, could just say to any multinational corporation, “If you want to rip us off, we will confisate your property here, just like we confiscate the property of pirates and drug king-pins.”

The problem is that the people of a nation do not stick together. Instead, the lawyers of the multinational corporations draft the laws, turn the drafts over to the legislatures, with a nice bribery/contribution check, and the laws benefiting the multinational corporation get passed.

In other words, the people of that nation didn’t stick together.

How can you expect an even larger aggregation of humans, the international body you suppose, to stick together against multinationals?

But I couldn’t live on my Social Security, etc. if Walmart were broken up because “our government” would not recognize or recompensate in purchasing power the reciprocal increase of my cost of living in food, clothing and drugs.

Why is Reuters giving this man a platform for his viewpoint? Even a casual skimming of stallman.org (his personal website) brings back more than enough evidence to lump him in with Jeff Rense/Alex Jones crowd of whackadoodles.

Great idea: try to build planes in small or medium sized companies.
Some people make the mistake of believing they are geniuses on everything.
With all due respect for this guy’s achievements, I would like to suggest him to stick to his sphere of knowledge and wisdom.

I like it! Now, which will come first, a progressive corporate tax rate or commercial flights to the moon colony – on Titan? The Members of the One Percenters Club will be taking those flights long before there’s such an improvement in the tax structure.

Stallman is a key person in providing software which powers a good deal of the WWW.

His open software C computer language provided the basis for Linux. Linux has provided the basis for Apple computers, to my understanding (through Steve Jobs NEXT development, brought to APPLE). Linux is at the heart of Amazon’s Kindle. Perhaps this background explains Reuters choice. Anyway, good for Reuters.

You, OneOfTheSheep, are undoubtedly using Stallman’s oeuvre right at this moment.

If Stallman is what you call a whackadoodle, we sure need more of them!

Your proposal will not work unless every government on earth follows suit.

Size can be, and often is, a competitive advantage. JL4 touched on this by stating that mom and pop stores have a hard time competing with Walmart. It’s a fact that larger companies can leverage greater economies of scale and scope.

What most have failed to consider or realize is that this is a global economy where we compete globally. How can you expect Ford to compete with Toyota when Ford has to break into 13 companies just to avoid extreme taxes?

Along those same lines, do you think Toyota will continue producing cars in the U.S.? No way. They’re going to instead manufacture the cars in a more business-friendly country, sell them to middlemen, and avoid direct sales and operations in the U.S. altogether.

Insofar as economies of scale/scope are a business advantage, your proposal will ultimately harm American corporations by hindering their ability to compete globablly.

With regard to sticking to one’s “…sphere of knowledge and wisdom”, I respectfully suggest you consider your own advice.

In war time it has been necessary at times to design and build aircraft, ships, etc. in modules in different locations so one bombing raid does not present such damage that production stops. That knowledge and experience is entirely consistent with modern PERT and CPM project management techniques.

General Motors and other large companies routinely use smaller independent suppliers to make many vital components of their vehicles, as does Boeing and other aircraft manufacturers. So a “contracting entity” can be quite small and accomplish quite complex design and production undertakings by subcontracting and supervising smaller companies that are independently administered and technically competent.
People who habitually focus on all the ways something worthwhile can’t be done are worth nothing. In government, they waste everyone’s productive time.

In “private enterprise” those who can visualize one or two ways something CAN be done usually do well. I find capitalism amazing in how quickly competence and effectiveness rise to the top when given the chance (and a reasonably “level” playing field without undue favoritism).

Our government, unfortunately, has many “favorites” that forever feed at the public trough.

Any thinking person will agree with AdamSmith’s appreciation that Reuters provides a credible place to offer ideas which may challenge conventional views. I further agree with him that “Who espouses those ideas, is unimportant”.

As a person who refused to get a personal computer before the Mac, where one could plug it in and be instantly productive, I am highly impressed by anyone involved with the design end of Linux, NEXT and the Mac.

DON’T like how OSX was ultimately foisted on Mac consumers in a “in your face different, get used to it” manner. DON’T like the ongoing exploitation of consumers by increasingly short hardware/software cycles that obsolete machines long before “their time” and take an inordinate amount of personal time just to maintain existing “capabilities”. Don’t see Mr. Stallman involved there, though.

For maximum competiveness we want firms as near to economic scale as possible. So we should break up the ones above twice economic scale and give incentives to the ones less than half economic scale to merge.

By economic scale I mean the size that can produce and/or market best in the area of completion the company in question is in. Others would say the minimum size firm that can compete in area effectively. In either case it would best for America if all firms where near economic scale.

The premise of this article is wrong. There is no company out there that is “too big to fail”. That is a Bush era term that should have disappeared along with GB’s anti-capitalist policies. Punishing a growing business with progressive taxation on gross income is simply unamerican. Think of all of the jobs that would never be created with a system that punishes growth. Think of all of the jobs that would be lost as these companies break up and seek efficiencies in a punishing market. Look, I’m no fan of Walmart. It was my account for over 5 years. The truth is, though, that I can buy my groceries at Walmart for about half of what it would cost me to buy at an independent grocer. Big business is not the problem. Government intervention is the problem. Success should NEVER be punished. NEVER.

The premise of this article is wrong. There is no company out there that is “too big to fail”. That is a Bush era term that should have disappeared along with GB’s anti-capitalist policies. Punishing a growing business with progressive taxation on gross income is simply unamerican. Think of all of the jobs that would never be created with a system that punishes growth. Think of all of the jobs that would be lost as these companies break up and seek efficiencies in a punishing market. Look, I’m no fan of Walmart. It was my account for over 5 years. The truth is, though, that I can buy my groceries at Walmart for about half of what it would cost me to buy at an independent grocer. Big business is not the problem. Government intervention is the problem. Success should NEVER be punished. NEVER.

The author goes from banks to companies in general, which is coinfusing. Unfortunately, Mr. Stallman never discusses why large is bad other than repeating the same tired line from the administration. I agree with an earlier commenter about production and economies of scale. Unless the author can also suggest how incomes are to increase in order to pay for the higher prices smaller companies will charge consumers for services due to their higher marginal costs, the Chinese model of thousands of cooperatives replacing the few large corporations won’t work.

Mr. Stallman doesn’t need to discuss “…why large is bad…”. We know from the antitrust laws that are on our books, increasingly unenforced.

Fortunately there aren’t many places where it seems the gas stations call each other before changing prices, or a few families control all liquor prices within a state. But there are places where the fox is in charge of the henhouse.

If there were more genuine competition for variety TV, the cable and satellite companies could not force consumers to pay for hundreds of channels they never watch just to get those relative few they do.

In Texas, it appears the energy regulating process is effectively controlled by the energy companies, it’s insurance commission by the insurance industry, it’s funeral “industry” by those providing such services.

Lawyers and judges seem to be accountable to no one but themselves nationwide. With so many of them in politics, I find it hard to deem that CONFLICT OF INTEREST a coincidence.

Great idea Stallman. But how do we implement it ? How do we get rid of the old man from the back of Sinbad the sailor ? Tax laws are written by these who are too big to fall. How would you get entrance into the business of writing tax laws ?and, then there are the business men’s own the GOP . How do you get past / around them to make laws which they don’t
Ike ? Therein lies the rub .

But thank you for an open source solution. Bless you , Stallman . One day , that day too will dawn when the writing of tax laws fall into the hands of the govt. of ” we the people ” , hopefully .Thanks Reuters for voicing such original simple solutions to the complex problem of growing too big to fall .

@AdamSmith:
Regarding your questioning above on my statement:
“The only way to face and control the multinational is through multinational people action, that is, world government.”

I don’t see how a particular nation of people sticking together, Canada for example, could address the issue of corporations taking, for instance, their polluting, global warming means of production to another country that is desperate for the jobs. Clearly you need global regulations to handle global polluters.

This reasoning can readily be applied to any of the means corporations off-load the costs of production on to the people of the world. As another example, corporations who use child labor off-load moral responsibility on to the consumers of the world. Or, corporations abruptly close their factory doors with no warning, leaving their host country to cope with joblessness and ruined careers of the workers. Bribes, as another example. The list of possible corporate international malfeasance, if corporations are not properly controlled, is probably infinite.

Of course, the idea of world government is very scary, but in some sense we already substantially have it, through the multi-national corporations. However, this is international government by a small elite, and is hugely undemocratic. Without the world sticking together, there is no comprehensive control of the corporations.

It seems to me that we (people of the world) need a democratic governing body for all international economic activity. However, the concern is that such a body could take over most of national sovereignty in other spheres of life. Particularly in the US, it is difficult to separate economics from any other part of life.

A good equation to use for this could be 1-(M/X)^(1/C) where X is the gross revenues of a company, M is the minimum amount of gross revenue a company needs to earn in order to be taxed, and C is an arbitrary tax constant meant to give the function an appropriate curve.

I’ve tested this for personal incomes with success, though I don’t know how well it would apply to businesses since they take in much more money. the behavior of this function as it approaches extreme values is a tendency toward 100% taxation, but I’m sure the right values for M and C could be chosen in order to ensure such an event does not happen without ludicrous amount of income.

Personally I’d prefer to see a system which is dependent on profits as well as gross income. Profit is what corporations’ primary objective is, it’s a responsibility they have as publicly traded companies to their shareholders. Not including this pivotal variable is ignoring a major part of what make a corporation what it is. Something along the lines of sqrt(Gross Income)/Profit = tax percentage, which gives businesses incentive to maximize profits while remaining manageable sizes, plays to the nature of the beast.

The problem with this suggestion is that size alone, regardless of how you measure it, is a poor criterion for how potentially harmful a business may be to the global economic system. Some companies grow large through designing and making stuff that people need or want, providing jobs and advancing technological progress in the process. Others, like many financial institutions have moved away from their roots in providing essential services to our economy and instead have essentially developed casino operations which dwarf their legitimate business activities, but are fatally intertwined with them.

By dint of churning massive volumes of various financial instruments with millisecond precision through the global financial system, far more than is needed to support genuine economic activity, and using the best brains and equipment money can buy to maintain marginal advantages over other so-called investors, obscene profits can be made, though largely it must be said through taking money out of one investor’s pockets to put into another’s. This inevitably leads to instability with the parasite in danger of killing the host, necessitating the massive rescues we have all had to fund.

My solution would be far simpler, and as such unlike a complex company tax regime, could stand some chance of the global implementation needed for any such scheme. I suspect that the main reason for the massive growth in unproductive and risky trading is the ability to trade assets within milliseconds of some price threshold being reached. This may reduce risk to the institutions providing such “investment” services, but promotes instability and short-termism which is the opposite of what is required to support the real economy.

I would therefore suggest that governments just agree to give all financial institutions one years notice that from a certain date no financial asset or instrument could be held by any individual or organisation for less than 24 hours. This minimum holding period should be increased by 1 day per year thereafter, for say 30 years, or until such time as trading volumes move back into line with what is actually required to operate the real economy.

I don’t see this as the best approach. The debt ratios should be regulated. Large companies should only be allowed small debt ratios (ie GM), while small companies should be allowed large debt ratios. There could be 5 levels of maximum debt ratios, from small to big. Small companies could borrow big & many would fail but as the ones that succeed grow bigger, they would need to become less leveraged. The largest companies would be the least in debt & if they did begin to require more debt they would then have to consider breaking up, before they became over leveraged & too big to fail.

I dont think that there should be such thing as “To Big to Fail” but more government is not the solution. The only way to make sure the bad businesses fail is to let them be at the mercy of the Free Market. What RMS wants is to let the government control the corporations and making sure no business grows big, even if that’s the will of the Free Market.